Breakingviews - ICOs validate old-school "follow the money" mantra

NEW YORK (Reuters Breakingviews) - Call it teething trouble with tezzies. One of the biggest so-called initial coin offerings to date, which raised some $230 million for a blockchain project called Tezos, has led to a spat between its architects and a Swiss foundation that controls the digital cash, according to a Reuters special report. Even in the world of crypto-currencies, traditional financial motivations apply.

ICOs, a hot financial trend with well over $2 billion raised this year, fall somewhere on the spectrum between crowd-funding and issuing non-voting shares. Participants contribute existing digital currencies like bitcoin and ether. Some may simply want to bankroll the project in question, but most hope to grab a slug of whatever new online coinage is on offer – in the Tezos case, “tezzies” – and to see it appreciate, as ether has done nearly 40-fold this year alone.

The creators of Tezos, Arthur and Kathleen Breitman, got the fund-raising formula right. However, they set up a governance structure in which a legally independent Swiss foundation controls the digital cash raised. Now they are at loggerheads with its president, Johann Gevers, who told Reuters the couple were trying to control the foundation. They have accused him of “self-dealing, self-promotion and conflicts of interest.”

The Breitmans stand to collect a portion of the proceeds – now in theory worth roughly double their original value – as Tezos project milestones trigger the foundation’s purchase of their company, Dynamic Ledger Solutions. Yet although it seems a sensible step in the experimental world of ICOs to incorporate checks on the use of the funds raised, the Swiss foundation may have been a method too vulnerable to human whims.

Meanwhile, China and South Korea have banned ICOs and the U.S. Securities and Exchange Commission has expressed concerns. Project details can be very sketchy and it’s not always clear what contributors are entitled to receive. Kathleen Breitman likens the Tezos fundraising to making a donation and receiving a tote bag in return, but people interviewed by Reuters seem more like investors who are expecting returns.

The backstory is intriguing. The Breitmans met at a crypto-anarchist lunch. He, the son of a French playwright and actor, went on to work at Goldman Sachs and Morgan Stanley, while she later toiled at Ray Dalio’s secretive hedge-fund firm Bridgewater Associates. An early backer was Silicon Valley doyen Tim Draper. Right now, though, an old-fashioned mantra seems to be at work: “follow the money.”